Pushing Back on the margin squeeze Part II

Article By

Peter Wilkinson

Director - Tipping Point Advisory

By popular demand (as it’s been the talk of the industry for some time) let’s revisit the “margin squeeze” issue.

In the context of engineering and construction, we’re talking here about the increasingly common practice of major contractors bidding for and securing projects at “competitive” margins and seeking to dictate the price at which subcontractors and suppliers will provide input services. I’m sure you’re familiar with “tender for tender” requests and various other means for competing prices which I won’t elaborate on here. In short, the sharper the project price, the more margin pressure brought to bear on the supply chain.

You may recall in one of my earlier articles on this subject, the proposition that half the equation in being fairly rewarded for the value you’re delivering to your clients is being crystal clear about that specific – and ideally unique - value that your business has on offer.

But what about the competition you might ask? And indeed, you would be quite right to pose the question!

Because here’s the thing: The current reality is that competition at the top end of infrastructure construction has really ramped up over the last 5 years. You may have taken note of the major Contractor that has consolidated its business via acquisition and secured the lion’s share of the recent work on offer. You may have also observed the number of recent International entrants that have packed up and left, the increasing number of smaller contractors going broke and the high-profile local Tier 1 Construction contractors with poor results and a “for sale” sign on the door.

There’s as much project activity on as there’s ever been in Engineering and Construction, particularly in NSW and Victoria and increasingly in Queensland. In the absence though of a strong Government view on International industry consolidation and the benefits of local ownership and control…..it’s a tough challenge to find jobs on offer at a reasonable return.

In this situation, I imagine you might suggest that advice along the lines of “get really clear about what your ideal client/opportunity looks like and the answer will show up” sounds at best a bit naïve.

Just before you dismiss this concept out of hand though, have you fully considered the different ways in which your ideal opportunities might present themselves? As a starting point have you truly considered:

  • Potential jobs in a related industry sector that require the core skill set that your business delivers?
  • Opportunities to participate in a different position in the contract chain – for instance a contractor might consider separately offering specialist contractor management or project management services – where the competitive pressures might look and feel a little different?
  • Jobs that with your own resources might be a bridge too far, but as part of a partnering based approach (say a Joint Venture) could result in better outcomes for both parties?

Great businesses anticipate the winds of change and respond to them, exploiting the opportunity by choosing a strategy appropriate for the circumstances before opponents pick up on what’s going on.

At the end of the day though, it might just be that the time’s not right to take that next job on board. If that’s the case, make sure that before you need to make the call you’re really clear on your “Best Alternative To No Deal” (BATNA). Because there’s nothing more likely to convince you to sign on the dotted line at any price than that feeling that you’re looking at the last opportunity you’re ever going to secure….

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